What's the Risk of Inflation With 9.7 Percent Unemployment?

Wednesday, 09 June 2010 04:18

The NYT discussed the likely path of fiscal and monetary policy. It noted that it was unlikely that the Fed would adopt a substantially more expansive path concluding with a quote from an economist: "A second round of quantitative easing at the moment would substantially increase inflationary risks."

It is worth noting that there is no economic theory that shows quantitative easing (the Fed buying long-term bonds) leads to inflation when the unemployment rate is far above normal levels, as is the case at present.

"A second round of quantitative easing at the moment would substantially increase inflationary risks."

This error will be corrected in the next edition of the NYT as follows: "A second round of quantitative easing at the moment would substantially increase inflationary risksdecrease deflationary benefits to wealthy investors holding large amounts of debt for future recovery at repayment terms fixed at current nominal value."

Congratulations debtors, you've been shorted by the Fed.

+1

...written by skeptonomist,
June 09, 2010 11:40

The purpose of quantitative easing - like that of normal open-market operations to keep federal funds low - is to increase inflation and decrease deflation - period. Is it possible to be in danger of inflation and deflation simultaneously? This concept is what makes rational economists like Dean and Paul Krugman tear their hair.

A historical note; stagflation, that is simultaneous high unemployment and inflation, occurred in the past when the Fed raised interest rates drastically. Those who call for raising rates now not only subscribe to peculiar theory, they seem to have no awareness of economic history.

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